Geopolitical risks and inflation: Insights across time horizons

How does geopolitical risk influence inflation? Using monthly data from 1996 to 2023, this study examines the impact of geopolitical risk on inflation across nine advanced economies, the USA, Canada, Belgium, Germany, Spain, France, the UK, Italy, and the Netherlands, . A four-step empirical approach is employed: (1) a fixed-effects panel regression model estimates the baseline relationship, (2) a Two-Stage Least Squares (2SLS) approach addresses potential endogeneity, (3) a Panel Vector Autoregressive (Panel-VAR) model explores dynamic interactions, and (4) impulse response functions (IRFs) assess the persistence of geopolitical shocks. The analysis reveals distinct inflationary patterns, showing that while geopolitical risks generally moderate inflation during non-conflict periods, the Russia-Ukraine conflict significantly heightens inflationary pressures over the short, medium, and long term, reflecting prolonged economic disruptions, supply chain issues, and market volatility. These findings offer valuable insights for policymakers, emphasizing the need to integrate geopolitical risks into inflation forecasting and monetary policy to improve accuracy and resilience in the face of global uncertainties.